Obligations of the Partners
Section 1 – Obligations of the Partners amongst Themselves
Relations created by a contract of partnership
(1) Relations among the partners themselves
(2) Relations of the partners with the partnership
(3) Relations of the partnership with third persons
(4) Relations of the partners with third persons
Article 1784
A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679)
Note:
Partnership is perfected by mere consent and if ALL the requirements are met
Notwithstanding the fact that the partners have not given their contributions yet
Example
A and B agree to form a partnership that will begin on December 1 and upon the arrival of certain machinery needed by the business. In this situation, are A and B in already in a partnership?
As long as the agreement remains executory, then A and B are NOT partners therefore there is no partnership yet.
Partners may agree to form a partnership to take effect in the future
A and B agree to form a partnership 1.5 years later, with contributions of P100,000.00 each. A contributes his share early but when the time comes for B to contribute his share, he refuses and says he no longer wants to partake in the partnership. Can A compel B to contribute his share to the partnership?
Answer
NO. Because they cannot enforce the contract since it was perfected 1.5 years ago and the contract was only oral. Since the contract was for 1.5 years, it was greater than 1 year and should have been written instead.
REVIEW
What is an Unenforceable Contract?
An unenforceable contract or transaction is one that is valid, but which the court will not enforce. Unenforceable is usually used in contradistinction to void (or void ab initio) and voidable. If the parties perform the agreement, it will be valid, but the court will not compel them if they do not.
What are Unauthorized Contracts?
Statute of Frauds defined (Article 1403, paragraph 2)
Requires that certain contracts be in writing, and that they be signed by all parties to be bound by the contract. Although there can be significant variation between jurisdictions, the most common types of contracts to which a statute of fraud applies is:
mnemonic “MYLEGS”
Article 1785
When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. (n)
Example
If A and B form a partnership to last until December 30, 2021 and A is the manager and they share profits 50-50 and after December 30, 2021 they continue with their partnership. What happens?
Answer
A and B retain their rights, meaning A is still the manager and they still share profits 50-50.
Article 1786
Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a)
Article 1787
When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being the account of the partnership. (n)
Article 1788
A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. (1682)
Example
A, B and C are partners. A promises to contribute a BLUE CAR, B promises to contribute GOODS WORTH P50,000.00 and C promises to contribute P50,000.00 IN CASH on October 2021. On said date, none of them comply.
Answer
A, B and C thus become debtors to the partnership (Art 1786)
Suppose B and C contribute their parts but A does not. Can B and C ask for the recission or annulment of the contract?
NO. If one of the partners fails to comply with his requirements, then the others can request for specific performance with damages from the defaulting partner A.
What are the obligations of A before October 2021?�
(1) To contribute what he promised
(2) To be held liable to answer for eviction if the partnership is deprived of his contribution
(3) To take care of the contribution with the diligence of a good father of a family.
Example
Suppose A leased the car out and gets it back by December 2021.
Then A must deliver the car and the fruits (profits from lease) to the partnership because there was a delay.
Suppose that after A contributes the car, a 3rd person, D claims to the real owner of the car and is able to prove so.
Then A is held liable for eviction because the partnership is deprived for a specific thing. A is also held liable for damages to BOTH the partnership and to D.
What about B? Can the partnership determine the value of the goods he contributed?
In Article 1787, it clearly states that the goods SHOULD be appraised by the partnership. If there was no agreement/stipulation, then the partnership shall have the goods appraised by an expert.
What if the goods appreciate/depreciate?
It will be charged to the partnership’s account.
What will happen if C fails to comply with his obligation?
C will be liable for his contribution plus interest and damages from the date he was supposed to contribute. The same rule will apply if the partners take money from the partnership’s funds without everyone’s consent. He will however, not be charged for theft or estafa and his obligation will only be to return the money he took plus interest and damages from the time he took the money.
When will a partner be held criminally liable?
Suppose the partners set aside P10,000.00 for payment to one of their creditors. A takes this amount from the fund and is subsequently discovered to have done so.
Then A can be charged for estafa since he misappropriated the money ALREADY SET ASIDE.
�Article 1789�
An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. (n)
Problem
Suppose that a partnership is engaged in an automobile repair shop. A is the industrial partner (chief mechanic) and works only up to 5PM every working day. Can he go home and work on the partnership’s customers’ autos, even if he says it to the capitalist partners EVERY DAY before he leaves?
Article 1789
The law says that there must be EXPRESSED permission, in this situation, all A has is IMPLIED permission. The capitalist partners’ remedy is therefore to either: (only one)
(1) Avail of the benefits from A’s “business”
(2) Exclude A from the partnership and demand for damages
RULES!!!
• Capitalist partners are prohibited from engaging in SIMILAR businesses only.
• Industrial partners have the same remedies as capitalist partners.
CASE
Joe and Rudy formed a partnership to operate a car repair shop in Quezon City. Joe provided the capital while Rudy contributed his labor and industry. On one side of their shop, Joe opened and operated a coffee shop, while on the other side, Rudy put up a car accessories store. May they engage in such separate businesses? Why?
ANSWER
Joe, the capitalist partner, may engage in the restaurant business because it is not the same kind of business the partnership is engaged in. On the other hand, Rudy may not engage in any other business unless their partnership expressly permits him to do so because as an industrial partner he has to devote his full time to the business of the partnership (Art. 1789, NCC)
Article 1790
Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. (n)
Example
A and B decide to form a partnership and agree to contribute to the capital in the ratio of 60:40, how much should the partners contribute to the partnership?
The partners shall contribute in the ratio of 60:40, meaning if their partnership capital is a combined total of P10, 000.00 then A contributed P6, 000.00 and B contributed P4, 000.00.
Example
A and B decide to form a partnership but did not say how much the other should contribute, how much should each partner contribute to the partnership?
Since the partners did not give any sort of agreement as to the ratio of their capital contribution, we shall assume that they will contribute in equal proportions, meaning if the partnership capital is a combined total of P10, 000.00, then each partner contributed P5, 000.00.
Article 1791
If there is no agreement to the contrary, in case of imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall be obliged to sell his interest to the other partners. (n)
If there is an imminent loss in the partnership
Imminent Loss
Selling of interest
Agreement that the partner need not contribute additional funds in cases of loss
Things to consider
(1) There must be an IMMINENT LOSS
(2) The partner who is unwilling to contribute must be SOLVENT/FINANCIALLY CAPABLE
(3) There was no agreement that the partners will not have to contribute additional funds in cases of loss
If the purpose of additional contribution is simply to raise capital, then this article will not apply.
Article 1792
If a partner authorized to manage collects a demandable sum, which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter.
The provisions of this article are understood to be without prejudice to the right granted to the debtor by Article 1252, but only if the personal credit of that partner should be more onerous to him. (1684)
Example
A and B are in a partnership where A is the managing partner. C owes A a sum of P5,000.00 and the partnership a sum of P10,000.00. The credit to A is due on September 1 while the partnership’s is due on September 15, both debts are due and demandable. A collects from C a total of P3,000.00 only and A subsequently issues a receipt in his name. Is the partnership entitled to share in the P3,000.00?
Answer
Yes, but in proportion to their respective debts so A gets P1,000.00 and the partnership gets P2,000.00.
Example
Supposing there was no mention as to who the managing partner is, will the requisites of Article 1792 still be present?
Answer
Yes, in the absence of information relating to the identity of the managing partner, the assumption shall be that ALL partners are managing partners.
Examples
If A issues a receipt on the name of the partnership instead, to whose credit will the P3,000.00 be put?
The entire P3,000.00 will go to the partnership.
Supposing the credit of A carries 18% while that of the partnership carries only 10%. C pays A and says that theP3,000.00 shall be applied to A’s credit. Is the partnership entitled to share in the P3,000.00 still?
No, the debtor is given the right to apply payment to whichever debt is more onerous.
Article 1793
A partner who was received, in whole or in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given receipt for his share only. (1685a)
In this case, there is only ONE debt but 2 or more debtors, both of which are partners.
A and B are partners and C owes the partnership a sum of P10,000.00. B is the managing partner but A collects his share in the P10,000.00 and C pays A P5,000.00 to which A issues a receipt in his name. When B’s turn to collect comes, C is already insolvent. What should A do?
Answer
A shall return his P5,000.00 to the partnership and split it with B because C has already become insolvent
Note:
Article 1794
Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized. (1686a)
Compensation will not apply
A partnership between A and B is engaged in an autoshop business. A customer brought his car in to be painted YELLOW but A bought RED paint instead and the car is painted RED. Damages are suffered by the partnership for P30,000.00 due to the repainting. Can A compensate this loss using the profits he earned for the partnership?
Answer
A cannot compensate it with the profits he earned because it is his obligation to bring profits in the first place. The responsibility of the P30,000.00, however, may be mitigated by the court if by other activities, A is able to bring about unusual or extraordinary profits, meaning, he may be allowed by the courts to pay back just P15,000.00 instead.